Interview

Economic Statecraft: How to Play It, and Win

In a G-Zero world, as opposed to a G-7 or G-20 set-up, corporations need to pay more attention to governments, not economics, says Eurasia Group founder Ian Bremmer. What this means for Facebook, Coca-Cola, Apple, Siemens.

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Correction:An editing error mistakenly described where Wal-Mart does business. The correct version is 'And if it weren't for a G-Zero world, Wal-Mart Stores (WMT) would be in Russia.'

Companies once ranged the world, expecting that increasingly free and open markets would ensure rising revenue and profits. That no longer will be the case, at least in the world that Ian Bremmer, founder of New York-based Eurasia Group, a political-risk consultancy, described last week. The coming year's risks don't lie in Egypt or Iran, says Bremmer, but rather in a changed world directed by countries practicing "economic statecraft." Bremmer describes his theory at length in the recently published Every Nation for Itself: Winners and Losers in a G-Zero World. He recently explained to Barron's what the G-Zero world -- as opposed to the long-dominant G-7 or G-20 world -- might hold for investors in 2013.

Barron's:What is G-Zero and why should we care?

Bremmer: It is a world that is more difficult to navigate. The U.S. is no longer interested in or willing to provide the kind of leadership it has historically. It doesn't want to be the world's policeman or the lender of last resort or the driver of globalization. No one else is willing to do it, either. G-Zero replaces the U.S.-led flat world. It means a lot more volatility in the markets, since you'll have a lot of different standards, types of trade flows, gravitational centers.

"The one election that really matters is the one no one was talking about, which is Japan…This is absolutely a move to the right."
Ken Schles for Barron's

Companies need to hedge, to be able to pivot, so they don't end up underperforming. You see Japan's difficulties because of the conflict with China. In a flat world, in the absence of G-Zero, a Japanese exporter like Nissan goes where the economics are good and doesn't pay a lot of attention to governments. In a G-Zero world, politics matter more. Suddenly, the China-Japan conflict is enormously important, and exports to China fall off a cliff. Nissan used to sell 25% of its cars to China. Now half of that is gone. Likewise,
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(ticker: FB) thought it was in a flat world; it isn't. Facebook's goal is to sell to the seven billion people in the world, [with] a big connect to the first billion. But the world's largest Internet market, China, has no interest in Facebook. They want their own. That's not a flat world.

Governments matter a lot more. G-Zero is an environment where you have many frenemies, as opposed to outright friends and enemies. That is difficult to navigate.

How does the fiscal-cliff debate fit into this scenario?

America is unwilling to focus on the international precisely because the domestic feels so profoundly problematic -- with heightened unemployment, the expanded gap between rich and poor, and the ineffective response to disasters starting with Katrina and going through the financial crisis and the BP disaster. With Congress having just an 18% approval rating, Americans don't want to deal with things like Syria. That shouldn't surprise us in the context of G-Zero. I happen to believe something will get done [to forestall the fiscal cliff], but it will be an incredibly limited deal, barely good enough, and it won't inspire anyone in terms of showing Democrats and Republicans working together.

This is the U.S. today. We want a smaller footprint. We want to be reactive.

Do the implications relate more to companies or macro markets?

For some companies, G-Zero doesn't matter much. It doesn't matter if you are truly a global company with a powerful brand that no one can replicate, such as
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(KO). But for some pharmaceutical companies, it matters, absolutely.

Increasingly, in India or Thailand, you don't have effective patent protection, and they'll undersell you and give rights to other companies for the drugs you've developed. Energy, commodities, technology companies -- all compete with state-owned enterprises.

Siemens
' (SI) technology was taken by companies they partnered with in China. And if it weren't for a G-Zero world,
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(WMT) would be in Russia. The emerging markets are two-thirds of the world's economic growth for the past five years and have very different attitudes toward rule of law and governments. To think how vastly different China's systems are from what the U.S. and our allied advanced industrial democracies prefer is important. Companies increasingly have to figure out which markets aren't strategic for them from a business and political perspective. Once, a Pizza Hut could sell pizza on every street corner. Now there are real competitors that aren't interested in its having market share. Companies need to recognize that and cut their losses.

For some organizations, consolidation will be significant. In a G-Zero world, growth is more problematic; resilience is more important. A multinational like
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(GE) has more advantages in a G-Zero world because in a country like China, it can make all sorts of bets, understanding that some will be loss leaders. It will lose technology, and won't even be in that business in five to 10 years because the Chinese will take it. A one-trick pony like
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(AAPL), that has one product that can potentially be replicated, might be in serious trouble.

American companies aren't facing a precipice. But we aren't well set up with the U.S. government to make economic statecraft to help American companies deal [with G-Zero]. You could argue Japan, France, and Germany have better economic statecraft than we do, and the government plays a bigger role. Countries are starting to get it. The Canadians are proactively thinking, 'How much do we want China to be allowed to invest in us, and what does that do to our relationship with our buddy to the south?'

The notion of U.S. energy independence is a significant theme that emerged in 2012. What does this mean geopolitically?

Whether you think the U.S. is in decline depends completely on whether you're thinking top-down or bottom-up. Bottom-up, the U.S. has been in decline for decades -- I'm talking about [people in] the lower 50% of earnings, whose total net worth has not improved. Top-down, if you think about corporations developing extraordinary technologies, the U.S. is probably stronger than at any time before the financial crisis. From the top-down, the U.S. had 3.1% growth in the third quarter: The Europeans and Japanese wish they could touch that.

Emerging markets do better, but are more unstable. The U.S. isn't unstable.

Plus, the U.S. is the world's leading producer of food calories that will become more important over time. Not to mention, it's the world's most important military and cyber-security provider, which will matter much more to us and our allies over time. The U.S. role is still utterly essential. It's just that our willingness to provide global leadership will be low, because a lot of Americans don't think we can benefit, and many countries oppose U.S. values, standards, and preferences.

So, the U.S. will become the world's largest producer of oil and exports. In G-Zero, increasingly, the U.S. will not be turning to the Middle East for energy. So, why exactly would the U.S. spend so much effort trying to ensure a peace deal between the Israelis and the Palestinians? Even Israel will find its relationship with the U.S. more problematic. It will still be an ally. But the willingness of the U.S. to focus on it will be lessened. It will also affect Japan and Britain, which are also special relationships.

Last year, the scenarios of a European crisis, a Chinese meltdown, and a nuclear Iran didn't make your list of risks. What about this year?

Frankly, what people thought were major risks for 2012, weren't.

Someone at the Economist magazine ordered a lot of cover images of the euro zone imploding. I hope they're done. Fundamentally the European Union institutions are strong, vastly stronger than any other supranational institutions. The EU actually functions, and the European Central Bank functions. Time magazine in its eminent wisdom just awarded [President Barack] Obama Person of the Year.

[German Chancellor Angela] Merkel should have been [angry]; she wasn't even runner-up. She got very strong approval ratings for sticking with the euro zone and building rule of law and making it work better. So, 2012 was a year of muddling through that was pretty effective for Europeans, even if [recovery wasn't] as fast as the markets wanted. You know the markets want a quick fix.

Politics demands a stable fix, a sustainable fix. The problem worked its way into fruition over decades, and it's no surprise it takes years to fix it.

What about Iran?

I was deeply skeptical last year that there would be strikes on Iran. I still think the likelihood is near zero. What was the quote from The Princess Bride, that it "would be absolutely, totally, and in all other ways inconceivable"? There are many things that people thought were inconceivable that aren't. We say that living with North Korean nuclear weapons is unacceptable, but you know they've got them. It reminds me of the joke where the KGB knocks and says, 'Does Ivan Ivanovich live here?' The man opening the door says no. They go to other apartments. Finally, they ask at No. 7, 'What is your name, sir?' 'Ivan Ivanovich.' 'Do you live here?' 'Do you call this living?'

So we can live with this stuff. I personally believe the likelihood of a strike against Iran is low, and it's important for the Israelis to make everyone believe they would attack, and we must pull them from the brink, because that makes us take it more seriously and makes sanctions tougher.

If an Iran strike isn't in the cards, what potentially destabilizing events from the Middle East should we worry about?

I feel good about Egypt. We don't like the country or government particularly, but Egypt is an important country, and people want them to succeed. President [Mohammed] Morsi is reasonably pragmatic, particularly in his willingness to work with the Egyptian military, where his bread is buttered. He also wants to work with the U.S., the International Monetary Fund, the Saudis, and where he will get more funding.

There will be more demonstrations. But from a stability perspective, Egypt is on a reasonable path. Syria is a disaster that is getting worse. You have over 50,000 dead and over 500,000 refugees streaming across borders, destabilizing Iraq, Jordan, Turkey. There is the potential for nationalism to grow. For Iraq, the Kurds are the real issue. I don't believe Assad or the Syrian military are done. They are still operating all over the country. They are moving chemical weapons around.

I don't think they are planning to strike; they want to show the international community that if you think you can take us out, we have lots of capacity, so don't think about it. There is deterrence going on here. For 2013, things will get worse; the opposition is getting military support, and, if possible, they will remove Assad. It isn't going to happen immediately, and 2013 will see an awful lot of fighting.

Let's talk about Asia.

At the beginning of 2012, people talked about the importance of political transitions, in the U.S., China, Russia, France. I thought none of them were going to matter. So looking back, how much did these elections matter? In the U.S., you had Obama and a divided Congress, which you have again. In Russia, you had Putin; now he is in a different position, same Putin. In China, you had nine guys in suits, and now you have seven. In France there actually is a difference -- the Socialists are in charge -- but the orientation to the euro zone is virtually identical. The one election that really matters is the one no one was talking about, which is Japan, where the Liberal Democrats won big, and the Japanese Restoration Party won big. This is absolutely a move to the right. It certainly matters for the Japanese economy.

There will be more stimulus. They will reopen more nuclear plants, which they desperately need. The last time Shinzo Abe was prime minister, he went to China on his first trip. He ain't doing that this time around. He is going to the U.S. The Japan-China relationship is toxic. These are the third- and second-largest economies in the world.

This matters. The Chinese believe they don't need Japan the way they used to; they don't need their money. The technology they can get from South Korea and Taiwan. What does that mean for Japan-China relations? They will focus on bilateral relations. They'll ultimately have better policy relationships and more influence.

[The Japanese] were scrambling their fighters in response to the Chinese just a week going into the election in Japan. They have asked to revise their military relationship with the U.S. to reflect this China threat.

They've spoken about strengthening the coast guard. You could very easily see much more in terms of military exercises, patrols, contested territory. There is military danger here, but it doesn't lead to war. But it could [lead] to much worse trade relations. Could it lead to more cyber attacks by China against Japan, more industrial espionage? Yes. It is difficult for the U.S. to prevent a sharp deterioration.

What will be the biggest surprise from the new Chinese leadership?

There will be no surprises. This group is incredibly consolidated.

They went from nine to seven seats on the Politburo Standing Committee. Hu Jintao, the outgoing president, surrendered his military position sooner than expected so Xi Jinping, the incoming president, could have more control. Li Keqiang, the incoming prime minister, will handle the economy rather than Wang Qishan, the most senior and noted market reformer. Wang will lead the anticorruption agency.

The Bo Xilai incident demonstrated that, in China, nails that stick up will be hammered down. The easiest way to prevent Bo Xilai is to limit the number of Bos. That implies consensus, an environment where we don't want to take risks, and they are worried about the U.S. and the global economy. The Chinese will be incremental on currency and the rest. They will not make dramatic moves toward fundamental reform.

Across the board, these seven in charge are reformists: They want redistribution of income and the Chinese consumer to become more important. All these things are significant. This group will not dismantle state capitalism, or decisively move against state-owned enterprises, or suddenly open up the Chinese banking system. People have been saying for a long time that China is going to look much more like the U.S. Well, it will be roughly the size of the U.S., depending on whose numbers you look at, and they are still going to be poor. So, these guys are still going to be committed to an authoritarian political system and state capitalism.

What are you writing now?

Pieces about economic statecraft and how geopolitics are increasingly turning to geoeconomics. Having an effective economic statecraft is the biggest challenge for us in the future.